This year, we have seen two audit and payment providers sued and subsequently driven to bankruptcy due to their malfeasance, while others are involved in legal suits. These are unfortunate circumstances to say the least. Yet the signposts to such circumstances are often identifiable if you know where to look.

With freight costs consistently rising and the complexity of determining total cost of transportation becoming ever more difficult to determine, the importance of having comprehensive and accurate visibility to help you model and determine shipping costs remains of paramount importance.

Whether you choose to audit internally or elect to outsource this function, there are some little secrets you should be aware of.

Comprehensive Audit or a Random Sample

Consider the complexity of the parcel contract and how the carriers arrive at a net rate.

Start with the base rate minus discount. Now add in the applicable assessorial charges. Don’t forget to apply the fuel surcharge (FSC) and properly account for which assessorials the FSC applies to from those it doesn’t. Keep in mind that the FSC periodically changes so be sure your system is up-to-date. Now there may also be adjustments that occur from the time a shipment is manifested until it is delivered. Often these adjustments are presented either on the original invoice or shortly thereafter. Sometimes the adjustments may not be reported for weeks after delivery and original invoicing. This also leads to the possibility of receiving duplicate invoices.

Do you catch and apply each of these adjustments, no matter the time frame, to properly arrive at the total cost of transportation at the package detail level for every shipment? Doubtful.

And that’s just parcel. If we are to consider Less-than-Truckload (LTL) then we need to take classification, a different host of surcharges, and FSC that are adjusted more frequently into consideration. Looking at international shipments, in addition to rating and surcharges, there are language and currency conversions as well as banking requirements that need to be taken into account.

Few companies have the robust, specialized systems required to do all of that. While most capture cost information, few accurately audit every aspect. Many will manually do a random sample or attempt a rate audit but miss surcharges, adjustments, and conversions. This is one reason why the freight audit and payment industry exists.

But are all auditors equal? No. Some will just conduct a spot check or random sample. Others specialize in a specific mode, for example, Truckload (TL). While they may do an excellent job with TL, they may simply spot check or run a rate audit only on parcel shipments. The key to overcoming this hidden secret is to ask your current or potential analyst how they go about analyzing your invoices and to make sure it’s a comprehensive method. Let’s take a look at some other, more egregious secrets and myths of freight payment.

Making Money on the Float

Many of the old-fashioned auditors set up a system where they would receive funds from the shipper in advance of issuing a check for payment to the carrier. From the date a shipper’s funds are deposited into the auditor’s account until the date the check to the carrier clears for payment, the interest on those funds was a prime source of revenue for that auditor. While an individual shipper may think there’s not that much to be made on their amount of funds, keep in mind that the auditor may have billions of dollars of freight under their management.

In today’s world of near zero interest rates and electronic fund transfers, if an auditor charges you little for auditing services and looks to make their money on the float in payment, something is amiss.

Understand the different between “audit to pay” versus “audit and pay” service options. Simply stated, in the “to pay” option the auditor provides comprehensive auditing services and gives you an authorized to pay or OK to pay report. The funds are always kept in your own account and you issue payment directly to your carrier(s). In the “and pay” model, the auditor notifies you of the amounts you owe, you transfer funds into an account from which they will disburse payment to the carrier(s). There are situations, especially if you have a large number of carriers to manage, where the “and pay” option makes great sense. This also leads us to our next secret.

Commingling of Funds

Nothing may be more important than doing your due diligence on the internal controls and processes of your auditor. Ensure that any funds you advance to an audit firm are maintained in a secure account, separate from the funds of other shipper clients the audit firm serves. If you find an auditor pooling multiple client funds into a single account from which they manage payment to carriers, the probability exists that one shipper’s funds are being used to pay another shipper’s carriers. This situation is what ultimately led to a few firms in the industry going under and being sued by clients who were left footing bills for which they had technically paid.

In an audit and payment application, the auditor is acting as a disbursement agent. Ultimately the shipper is responsible to make sure the carrier is paid for services provided.

Industry Standards Are Few

This is not a regulated industry. There are few watchdog groups or associations that report on adherence to acceptable business standards. In addition, many of the participants are privately owned firms, making it more difficult for you to obtain the wealth of information that is typically available for a publically owned company.

One source for accreditation is the Statement on Standards for Attestation Engagements, known as SSAE 16. In this evaluation, service organizations have their audit, risk, and control processes accessed by an independent party. Reviewing the results of this evaluation will help you determine the strength of a service providers systems and controls.

Given the numerous auditing firms that are private companies, financial records are often not readily available. A red flag should go up when an auditing services provider refuses to provide certified, audited financial statements to a shipper’s designated financial professional for review.

Carriers Complaining About Slow Payment

Oftentimes, the best source to find a pending problem, particularly when operating in an “audit and pay” environment, is a shipper’s carrier base. When calls start coming in from multiple carriers that they are not being paid within the terms of the agreement, and a shipper has advanced funds to the audit and payment company, immediate action must be taken.

Importantly, these dirty little secrets aren’t limited to outsourced auditors. Many of them can also happen with an internal audit and payment function that does not receive proper oversight. While most companies leverage professional, ethical companies and teams to oversee this critical business function, like any business area that involves significant dollar transactions, due diligence is imperative.

Doug Kahl is a Vice President with enVista, a comprehensive supply chain consulting and leading transportation services management organization. Doug can be reached at dkahl@envistacorp.com, 602.334.6233, or visit www.envistacorp.com.